The seizure of assets at Romania’s largest refinery Petromidia has put at risk a deal between the refinery’s owner KazMunaiGas International (KMGI) and China’s CEFC, a senior official at the Kazakh company told bne IntelliNews. KMGI announced on July 27 that it believed the Romanian authorities to intended to "seize and nationalise assets" belonging to the company.

The Chinese investor had planned to turn KMGI, which is mainly focussed on Romania at present, into a platform for developing projects in the EU, with investments of “several billions of dollars” in the pipeline, according to Azamat Zhangulov, senior vice president of KMGI. However, he warned that other investments by KMGI are already being delayed, and the deal with CEFC could fall through if the situation at the refinery is not resolved.

Romanian prosecutors seized the assets of the refinery and companies connected to it including KMGI on May 9. The Directorate for Investigating Organised Crime and Terrorism (DIICOT) said at the time that it was taking action to recover alleged losses incurred by the state budget amounting to €680mn.

Three former ministers have already been indicted in the investigation relating to the privatisation and a historic debt conversion by the refinery’s operator Rompetrol Rafinare, which was taken over by KMGI in 2007. Former Prime Minister Victor Ponta is rumoured to be under investigation in the same case.

Zhangulov told bne IntelliNews that while the seizure of Rompetrol Rafinare’s assets “does not obstruct our current operations”, it had potentially negative implications for the future development of the company.

KMGI is not longer able to use the seized assets to draw more financing, meaning it cannot develop large investment projects. Operations at its upstream business, Oilfield Solutions Company, have been halted after the seizure of its assets.

In a July 27 statement, KMGI said that together with KazMunaiGas it had submitted a notice of investment dispute to the Romanian authorities. This is a first step towards eventual international arbitration.

"The arbitration dispute concerns the treatment applied by the Romanian authorities to the investments performed by KMG and KMGI in their Romanian subsidiaries ... [the letter] also details asset freezes totalling more than $2.1 billion and the company's belief that it appears to be the intention of the authorities to seize and nationalize assets that have generated tremendous benefit for the Romanian economy and people," the statement said.

In comments emailed shortly before the news broke, Zhangulov indicated the company was already considering new legal measures. “On the one hand, we would like to reaffirm our commitment to fully cooperate with the authorities in clarifying the situation, but on the other hand it is our duty to make use of any legal provisions to protect our operations and investments,” he said.

Rompetrol Rafinare has already challenged the prosecutors’ decision to seize its assets through the Romanian courts. The Romanian High Court of Cassation and Justice ruled on June 17 in support of the seizure of the assets.

KMGI has sought to distance itself from the investigation, which it says concerns events that are suspected to have taken place before its takeover of Rompetrol. Zhangulov stressed there was “no connection to the current ownership of the company ... it was a surprise to us to see that the prosecutors seized the company’s properties.”

However, on July 6 EurActiv quoted government sources as saying that another Romanian body, the National Anticorruption Directorate (DNA) had seized documents relating to a memorandum of understanding between the state and KMGI on settling the debt issue.

While the assets remain seized and the investigation is ongoing, Zhangulov says KMGI has been forced to reconsider its position on the Romanian market.

“Bottom line, we continue our activities, but at this point we are assessing the overall business context in which we are carrying them out,” he told bne IntelliNews.

“We should mention that if the investment environment deteriorates due to harmful actions taken by the Romanian state, there is the risk for investors, including us, to look for better and safer environments in other countries.”

Commenting on the CEFC deal, signed the day before the refinery was seized, Zhangulov said that both parties were analysing the situation. “Although such external factors might affect potential transactions previously agreed by KMG, it is too early to say if our partnership with CEFC will continue or not.”

Under the deal, privately owned CEFC would have taken a 51% stake in KMGI for $680mn, after which the two companies would pool their resources in a strategic partnership that would extend beyond Romania to the broader CEE region.

“The partnership is part of a wider strategy developed by KMG: we plan to turn the KMG International group ... into a platform for developing new projects in the European Union,” said Zhangulov.

He also sought to highlight the potential damage to Romania of losing out on future investments. “This agreement is in the best interest of all parties involved, including the Romanian state. If it doesn’t succeed, it might be a loss not only for KMG International, but also for Romania, given that this investment means additional investments amounting to several billion dollars on the Romanian market.”

Despite the ongoing investigation, plans for KMGI and the Romanian government to set up a joint investment fund as part of the settlement negotiated between the two appear to be finally going ahead.

A memorandum of understanding signed in 2013 stipulated that KMGI would buy 26.7% of Rompetrol held by the Romanian state for $200mn as well as setting up an investment fund of which 20% would be transferred free of charge to Romania.

The launch of the fund has been long delayed, reportedly causing impatience within KMGI. However, on July 14 Romanian Energy Minister Victor Grigorescu told local media that the government had chosen SAPE, the agency that manages state holdings in energy companies, to represent it in setting up the fund.

According to KMGI’s Zhangulov, as soon as various additional steps are taken by Romanian government institutions - including the ministries of energy, finance and justice and the tax administration - the fund could start investing right away. “Once the green light is given and the fund is registered, we could start investing right away. We have the documentation ready for a project to expand our local fuel distribution network and one for a co-generation power plant at Petromidia refinery,” Zhangulov said.